Rig builders turn to major divestments to combat thinning funds

Capital injection is necessary to stay afloat.

With oil prices likely to stay low for longer, Singapore's two largest rig builders might have to sell some of their lucrative listed assets in order to ride out the downturn.

A report by OCBC stated that major divestments will be the Keppel Corporation's and Sembcorp Marine's first line of defense to keep funds from drying up. Keppel has a number of listed entities that are prime divestment candidates, including M1, Keppel REIT, KrisEnergy, Dyna-Mac Holdings, Keppel Infrastructure Trust, Keppel DC REIT and K1 Ventures.

On the other hand, SembMarine's parent company Sembcorp Industries will likely divest stakes in its overseas subsidiary Sembcorp Salalah, which is listed on the Muscat Securities Market.

OCBC said that divestments will be the preferred mode of boosting funds as opposed to cutting dividends or tapping equity markets to raise capital.

"In our view, KEP and SCI are likely to divest their non-core assets or investments that have netted a good return, before cutting their dividends further, and before considering the possibility of raising capital," said OCBC.

Should the two companies need to raise funds, OCBC said that a shareholder loan from Temasek is probably the easiest and quickest way, followed by a rights or warrants issue.

"This may pave the way for an eventual merger of KEP’s and SMM’s yard assets should the circumstances call for it. In our view, a privatisation of SMM by SCI should only be considered when there is more clarity over the fate of the Sete Brasil rigs,” OCBC said.